Automated Clearing House (ACH) is an electronic network for financial transactions in the United States. An ACH typically processes large volumes of both credit and debit transactions that are originated in batches, in which rules and regulations governing the ACH network are established by the Electronic Payments Association (formerly the National Automated Clearing House Association (NACHA)) and the Federal Reserve (the Fed). In 2002, the ACH network processed an estimated 8.05 billion ACH transactions with a total value of $21.7 trillion.
In accordance with the rules and regulations of ACH, no financial institution may simply issue an ACH transaction (debit or credit) towards an account without prior authorization from the account holder (often referred as the receiver). An ACH entry starts with a receiver authorizing an originator to issue ACH debit or credit to an account. An originator can be a person or a company (such as the gas company, a local cable company, or one's employer). Depending on the ACH transaction, the originator typically must receive written, verbal, or electronic authorization from the receiver.
Once authorization is acquired, the originator then creates an ACH entry that is presented to an originating depository financial institution (e.g., the originator's bank). The ACH entry is then sent to an ACH operator (often the Fed). The ACH entry is then passed on to the receiving depository financial institution (e.g., the receiver's bank), in which the receiver's account is issued either as a credit or debit depending on the ACH transaction. However, the receiving depository financial institution may reject the ACH transaction and return the ACH transaction to the originating depository financial institution. For example, the receiver's account may have insufficient funds or the account holder may have indicated that the transaction was unauthorized. An originating depository financial institution may re-present the ACH entry several times for settlement. However, the receiving depository financial institution may again reject the transaction.